We use cookies to customise content for your subscription and for analytics.If you continue to browse Lexology, we will assume that you are happy to receive all our cookies. For further information please read our Cookie Policy.

Tort of inducement to breach of contract requires actual knowledge and an intention to interfere

The House of Lords (HL) has delivered a significant decision on the scope of economic torts and, in particular, the distinction between the tort of procuring a breach of contract and the tort of unlawful interference (OBG Ltd and ors v Allan and ors; Douglas and ors v Hello! Ltd and ors; Mainstream Properties Ltd v Young and ors [2007] UKHL 21). The HL rejected the "unified tort" theory holding unanimously that the torts of inducing a breach of contract and the tort of unlawful interference are two distinct torts. See our litigation e-bulletin (here) for more details

For employment lawyers, the decision of Mainstream Properties Ltd v Young is of particular relevance and interest as the HL upheld the Court of Appeal's (CA) decision that actual knowledge and an intention to interfere are required to prove the tort of inducing breach of contract. The tort is thus one of deliberately, not just carelessly or negligently, inducing a breach

Some of you will remember the CA decision in this case, in which two senior employees of a property company (Mainstream) were found to have breached their contractual and fiduciary duties to their employer by diverting a business opportunity to their own joint venture. There was no appeal against this finding. The appeal related to the CA's finding that Mr De Winter, who facilitated the acquisition by partially financing it, was not liable for the tort of inducing a breach of contract. The HL upheld the CA decision. Mr De Winter knew of the contractual duties of the two senior employees but genuinely believed that the venture would not occasion a conflict with their fiduciary duties and contractual obligations. Although he was mistaken in his belief as the individuals were in breach, he was not liable for the tort of inducing a breach of contract as he did not possess both actual knowledge of the contract and an intention to induce a breach.

In terms of the requisite knowledge required to incur liability, knowledge of the existence of the contract alone is not enough. To be liable, the individual must have knowledge of the contract's terms or there must be evidence of a conscious decision not to inquire into the existence of a fact (an individual cannot escape liability by deliberately disregarding the issue). Further, the tort requires a deliberate inducement of breach. Someone who unknowingly and unintentionally procures a breach of contract by offering a proposal to a contracting party which persuades the latter to default on his contractual obligations will not be liable. Nor will he be liable if he acts carelessly or negligently. Mr De Winter, who did make inquiries but wrongly concluded that the actions would not cause the two senior employees to breach their contract, was not liable for the tort of inducing a breach of contract. Accordingly, an honest, albeit mistaken, belief that the action will not involve another's breach of contract will provide a sufficient defence. Lord Nicholls of Birkenhead said: "It matters not that his belief is mistaken in law. Nor does it matter that his belief is muddle-headed and illogical". If there is no intention to interfere in contractual relations, there will be no liability for inducing a breach of contract.

How would this case impact on, say, a poaching situation where a company fears a team will be induced to join a competitor in breach of contract? In that situation, it would be advisable for companies (once they know who is behind the poaching operation) to ensure that the third party, whether it be the competitor or a recruitment consultant, is made fully aware of the existence of the contract of employment between the company and the employees and the key terms of the contract which would be breached should the individuals take the proposed action. This should make it more difficult for the third party to argue that they did not have actual knowledge of the contract or that they did not intend their action to induce a breach of contract.

Compare jurisdictions: Arbitration

“The new ACC Newsstand is one of the best e-resources that I have encountered in 21 years of practicing Employment Law. The information is timely, helpful and easy to navigate. Thank you for offering it and please continue it indefinitely!!”